Pricing Stratogies

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Part 1

a). Market orientated pricing is where firms are market orientated. They produce what the market wants. This means a market orientated firm will set a price at the level the market accepts and that will create a demand level the firm is willing to accept.

b). Penetration pricing is where firms try to achieve a high level of market share. To do this the product needs to be priced at a lower level than the market leader. A good recent example was Microsoft launched its Internet Explorer for free, effectively destroying Netscape, who had be-ing selling their Internet browser for $50. Gross Profit Margins using penetration pricing are relatively low, but the objective is a high level of sales allowing a good Net Profit to be made. This pricing strategy can help establish brand loyalty and keep new competition out of the marketplace, but if the price is set too low, customers may think that the product is low quality and therefore brand image can suffer.

c). Market skimming means charging a high price to maximize profits on each item sold. There will be limited market but a profitable one. The ability to skim depends on having either a technological advantage or advantage based on brand image. If there are technological advantages, then some consumers, known as early adopters, are willing to purchase products so that they can be the first to own these products. A good example of this is Mobile phones originally sold for over a £1000 today they are a lot more affordable. Another current example of market skimming is the Dyson vacuum cleaner. This had technological advantage, which meant the brand has become the most popular vacuum cleaner brand at a price, which is more than double the retail price of the previous market leader. When originally sold in Japan, Dysons were priced at over a £1,000. Another example is Apple as a manufacturer are a world leader at market skimming, virtually all their products are launched using this pricing strategy.

d). Destroyer pricing is a predatory form of pricing where the objective is to force competitors out of the marketplace. This type of pricing is not only used by the largest firms on a national scale, but it can also crop up in battles between local firms.

One example of the use of destroyer pricing occurred, when the monopoly the London Evening Standard held in publication of a London evening paper was threatened by the launch of a Robert Maxwell owned competitor. In response the London Evening Standard dramatically lowered it's prices, eventually forcing the less financially strong (or committed) competitor out of business. Also News International the owner of The Times and Sunday Times has been accused in the House of Commons of using destroyer-pricing tactics in attempt to gain market share and perhaps force weaker competitors, such as the Independent, out of the market.